Swing Trading Strategies & Stock Picks Since 2003

I will make a quick summary assessment of future price action, and then address a question regarding the use of the A to B leg in measuring price objectives at the bottom of this post.

Fundamental and Earnings Information on RIMM

On the surface, everything looks rosy at Research In Motion (RIMM). Their new BlackBerry Storm 2 is about to be opened up widely on Sprint Networks (which is itself getting ready to introduce the first 4G Network infrastructure for its subscribers. RIMM has been fast grower as you can see from this link Sales growth has been north of 80% and net income growth greater than 30% in the past 12 months. Apparently, though, the Storm platform has its problems and could create challenges for future sales. If you believe sales forecasts, then RIMM has a near free cash flow fair value north of $150/share. Consensus estimate for calendar quarter 2 2009 is $0.99/share. Earnings do not come out until September, so there will be quite a period until we see if those earnings can be met.

Chart Analysis:

Take a look at the daily chart of RIMM. I have identified what could be the beginnings of the completion of a BULLISH XABCD Fibonacci pattern. The simple break of a support pattern happened yesterday when 67.53 support level was broken.

Why do I think that it is an XABCD pattern? This daily chart shows that daily momentum has reversed to the downside. What that allows one to do is to define the B and C points of the pattern. The B point is the momentum LOW after the price decline from point A, and point C is the momentum HIGH. C seems to be in an inapproprate position because a gap was filled, but nonetheless the point marked as C IS the momentum HIGH for that price swing and it will be used to measure the price objective.

If I have now identified the momentum reversal to the downside and I have defined points B and C from the upward moving X to A price leg (I hate calling them waves, as this analysis has virtually nothing to do with Elliot Wave analysis, but you can also call them legs), now what I have to do is to establish the objective for point D.

How do I do that? Remember my last discussion of UNG after the symmetrical triangle pattern was broken? The central thesis of price objectives is to assume (and there is ample evidence of this in price action over hundreds of years and thousands of examples) is that there will be a symmetrical move to the downside in which the distance from A to B will EQUAL the distance from C to D, regardless of the distance from B to C. Look the UNG chart I posted BEFORE it collapsed. Did we hit our objective? You bet we did.

The purpose of showing you that is not to impress you that I am some super-human forecaster. The purpose of showing you that is that most price moves ARE symmetrical and that you should use OBJECTIVE and QUANTIFIABLE means of measuring them.

Going back to the example of RIMM, what would the price objective be if A-B equaled C-D? The answer is simple. The high at A is 86.00, the low at B is 67.53. The difference between A and B is 18.47. The high at point C is 72.50. The estimate of the D point if A-B equals C-D would be 72.50-18.47, which equals 54.03. The target for this pattern completion is 54.03 for RIMM. Take a look at this objective chart, and note that there is some price support there around 54.03.

That calculation did not require calculus or some empirical formula. A fifth grader could do it.

But what happens if A-B does NOT equal C-D? This brings up the discussion of extension patterns and Fibonacci confluence. The first measure one should make are the key Fibonacci retracement areas between the X to A leg. See this chart for those measurements and for the coming discussion about confluence.

 There are two measures that are important:

1) Where is the tightest Fibonacci confluence?

In typical patterns, the 1.272 extension of the A to B leg has the greatest confluence with the 0.618 retracement of the X to A leg. You see that in perfect Gartley patterns. There are, however, some equally legitimate and tradable patterns for which the confluence occurs in other places.

In the case of RIMM, the 0.618 retracement is a better confluence with the 1.618 extension of the X to A leg. The loose confluence is about 1.65 as opposed to the 2.02 confluence between the 1.272 extension of A-B and the 0.500 retracement of X to A leg.

2) Where is the price support closest to the tightest Fibonacci confluence area?

There is also major price support near 54 (54.30) near that 1.618 extension of the A to B leg and the 0.618 retracement of the X to A leg. For that reason, the most likely completion target should be 54.30 (back to perhaps the AB=CD target of 54.03.

RIMM is a common example of where confluence though not tight, is very close to major support. In many cases, however, confluence is so tight that it is literally within pennies of each other (or an exact overlap). Those patterns should be paid the most attention. My neural net models love those.

I will not show it here, but there is a chance that RIMM could find support at 60.47 ( a major resistance area back in early February 2009) but if the sell off is strong over the next few days, that resistance has a high probability of breaking. That would lead to a quick gap fill very near the symmetry target of 54.03 that we discussed earlier.

Time symmetry: One person in StockTwits asked me when this pattern might complete for the purpose of using an option strategy to take advantage of price weakness in RIMM. It is quite possible for this pattern to complete quickly and if time symmetry matches price symmetry, then it may be possible for that move to occur in as little as 8 trading days. (since that is the length in days of the A to B leg). Clearly, you would have to enough time time to the option than that to prevent time value of options from dissipating rapidly. It could take longer or it could hit in a matter of a couple of days. But if symmetry holds and a selloff occurs, it should not take that long for the pattern to complete.

I would suggest you consult an options expert and make sure your risk management parameters are in place before deciding on an options trade for RIMM at this point.

CONCLUSION:

I don't care about what Cramer said about "hanging up on RIMM" or whatever fluff there is out there. The pattern indicates a severe period of weakness ahead for RIMM with a great potential for a gap fill. Yes, I think RIMM can be a much higher priced stock in the future if all works well for it, but I am worried about trading it NOW. Because of that I use specific rules of measurement to determine targets. You should do the same if you are trading, regardless of the trading method you use. If not, you are wasting your time and will ultimately waste your trading capital.

That's all I have for now. Remember, send questions to buffalotrader100@gmail.com until I fix this mess of a blog for comments. Stay tuned for more soon.